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Bond King Gundlach Feuds With Morningstar

Years of perceived slights and missteps preceded clash

Morningstar is scheduled to release a review of Jeffrey Gundlach’s DoubleLine Total Return Bond Fund this week, but the ratings firm’s fact-checking calls and emails are going unanswered, according to people familiar with the matter.
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Mr. Gundlach, who formed his investing firm DoubleLine Capital LP in 2009 and built it into one of the most successful fixed-income fund companies, is sparring with the research firm over what DoubleLine says have been a series of false and misleading statements about its flagship fund, according to people familiar with the matter.

Morningstar analysts, who are keenly followed by investors, are scheduled to release a review of the DoubleLine Total Return Bond fund this week. But their fact-checking calls and emails are going unanswered by Mr. Gundlach and his team, these people said.

The recent silent treatment from DoubleLine is the culmination of years of perceived slights and missteps. In 2011, Morningstar analyst Eric Jacobson gave the DoubleLine Total Return fund a “neutral” grade, despite strong performance.

Soon after, Mr. Gundlach and his team received only an honorable mention when Morningstar announced the closely watched nominees for its fixed-income manager of the year award. Mr. Jacobson again noted that the DoubleLine Total Return had performed well but the results were in part due to the fund’s holdings in nonagency mortgage-backed securities.

And last summer, Morningstar took the unusual step of labeling the DoubleLine Total Return Bond fund “not ratable” after Mr. Gundlach and his team declined to speak with the firm. A DoubleLine analyst in a statement at the time accused Morningstar of “serial falsehoods and mischaracterizations” about the Los Angeles-based money-management firm.

A DoubleLine spokeswoman declined to comment. A Morningstar spokeswoman said that analysts are conducting proper due diligence about the fund’s risks. “Investors rely on Morningstar to help them make better decisions, and they have a right to a specific explanation of the fund’s risks, risk controls and portfolio construction and attribution,” the spokeswoman said in a statement.

The standoff between DoubleLine and Morningstar is being watched closely by other money managers as a test of the grip Morningstar has on the rest of the asset-management industry. Investors have continued to pour money into DoubleLine Total Return, which has consistently beat its benchmark, indicating that at least some fund managers can skirt Morningstar’s clout.

Mr. Gundlach “has a past track record that he can point to,” says Scott Kimball, a senior portfolio manager at TCH LLC, which manages $11.5 billion and is a subsidiary of BMO Global Asset Management. “There’s probably enough information to constitute a sound decision without having to rely on Morningstar.”

Morningstar’s ratings are viewed as the industry’s seal of quality, said financial advisers and industry experts. Mutual-fund managers don’t always agree with Morningstar’s reviews, but most cooperate. DoubleLine’s Total Return Bond fund is one of only two funds in the U.S. that have received a not-ratable designation from Morningstar in recent years, out of 1,068 U.S. open-end funds Morningstar reviews. DoubleLine has retained its five-star rating from Morningstar, the highest level, a rating that looks at past performance, rather than analysts’ more in-depth assessment of the fund including its risk and other factors.

Mr. Gundlach, 55 years old, is well known in the money-management industry because of his regular investor calls and predictions about the markets. DoubleLine Total Return is among the fastest-growing bond funds in the U.S., ballooning to $46.3 billion in assets at the end of June from about $4 billion five years ago, according to Morningstar.

He has long been known to Morningstar, which serves 9.9 million investors. The firm named him fixed-income manager of the year in 2006 when he worked for TCW Group Inc.

The feud with Morningstar hasn’t dissuaded investors. In 2014, the fund had inflows of $7.9 billion, helped by the billions pulled from rival Pacific Investment Management Co.’s Total Return Bond fund after the departure of its star manager Bill Gross. It has taken in $5.9 billion so far this year through June, according to DoubleLine.

The DoubleLine Total Return fund also has beat its benchmark, the U.S. Barclays Aggregate Bond index, each year since its founding, according to Morningstar. Through July 10 this year, it has returned 1.01%, beating the benchmark and ranking it in the top 4% of similar bond funds.

Still, Morningstar has raised questions about DoubleLine’s performance that have rankled the company.

In announcing DoubleLine’s honorable mention for 2011 fixed-income manager of the year, Mr. Jacobson, the Morningstar analyst, again noted that the DoubleLine Total Return had performed well but the results were in part due to the fund’s holdings in nonagency mortgage-backed securities.

The statement came as nonagency mortgage-backed securities were performing badly, and despite Mr. Gundlach’s long tenure successfully managing such holdings.

Morningstar responded with a correction on Mr. Jacobson’s report, acknowledging that the firm had incorrectly labeled nonagency mortgage-backed securities as a source of outperformance, according to the correction. DoubleLine had multiple calls and meetings with Morningstar to discuss the inaccuracies.

But the relationship didn’t improve. Starting in 2012, DoubleLine began to refuse to speak with Morningstar research analysts. Morningstar analyst Sarah Bush noted in a 2013 interview with Financial Advisor magazine that the DoubleLine Total Return fund previously had a large holding in a type of debt with a coupon rate that reacts inversely to the benchmark rate, though it had reduced those holdings. Those instruments are known as “inverse floaters,” and could react badly to an interest-rate spike.

The comments came as DoubleLine managers beat the benchmark in 2013 when interest rates spiked, which DoubleLine interpreted as proof that Morningstar didn’t understand fixed income, said people familiar with their thinking. Morningstar has been complimentary of Mr. Gundlach in past reviews, referring to his “long and successful” track record in its 2014 assessment and his fund’s “smoking” performance in 2013.

A Morningstar spokeswoman said that early on, the fund’s yield was two times higher than the category average. “The market said the portfolio was risky,” she said in a statement. “Our analysts didn’t imagine that risk.”

Morningstar has said that the fund needs to be more transparent. In its annual report last year, analyst Ms. Bush said Morningstar needs more information on how the DoubleLine team is handling risk, particularly “esoteric” mortgage-backed securities.

Corrections & Amplifications

DoubleLine Capital LP’s Total Return Bond fund is one of two funds in the U.S. that have received a not-ratable designation from Morningstar in recent years, out of 1,068 U.S. open-end funds Morningstar on which provides Analyst Ratings. A previous version of this article said it was two funds out of about 3,300, which is a global number. Additionally, a Financial Advisor magazine article said Morningstar had concerns that a type of debt known as inverse floaters held by DoubleLine’s Total Return Bond fund could make it vulnerable to interest-rate jumps. The WSJ article incorrectly attributed that concern to Morningstar analyst Sarah Bush. Ms. Bush’s comments to Financial Advisor about the size of some of the fund’s past holdings were from a 2013 interview, not in 2014 as the article suggested. Morningstar’s first-ever review of the fund was in 2010, not in 2011 as the article said.